Mortgage rates soar to levels not seen in nearly three years

Inflation, which has been hitting consumers hard in their everyday lives, is also causing pain for home buyers in the form of soaring mortgage rates.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average spiked to 3.92% with an average 0.8 point. (A point is a fee paid to a lender equal to 1% of the loan amount. It is in addition to the interest rate.)

It was 3.69% a week ago and 2.81% a year ago. The 30-year fixed rate, which started the year at 3.22%, has risen 70 basis points in six weeks. (A basis point is 0.01 percentage point.)

Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.

The 15-year fixed-rate average jumped to 3.15% with an average 0.8 point. It was 2.93% a week ago and 2.21% a year ago. The five-year adjustable rate average climbed to 2.98% with an average 0.3 point. It was 2.8% a week ago and 2.77% a year ago.

“Mortgage rates jumped again due to high inflation and stronger-than-expected consumer spending,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “The 30-year fixed-rate mortgage is nearing 4 percent, reaching highs we have not seen since May 2019. As rates and house prices rise, affordability has become a substantial hurdle for potential homebuyers, especially as inflation threatens to place a strain on consumer budgets.”

After last week’s inflation report, which showed prices rose 7.5% in January, the yield on the 10-year Treasury closed above 2% for the first time since July 2019. It dipped briefly below 2% after concerns about a Russian invasion into Ukraine but has remained above that mark since Tuesday. It closed at 2.03% on Wednesday. The movement of the 10-year Treasury tends to be one of the best indicators of where mortgage rates are headed.

“The main factor pushing rates up last week was consumer price data, which showed prices increasing at the highest rate since early 1982 and broad increases across goods and services,” said Paul Thomas, vice president of capital markets at Zillow. “Investors are anticipating aggressive actions by the Federal Reserve to rein in inflation, driving rates higher. Markets will be focused on updates from the Federal Reserve this week and any developments with the situation in Ukraine, either of which could cause additional rate fluctuations.”

The minutes from the Federal Reserve’s January meeting, which were released this week, contained no surprises. The Fed has been signaling for some time now that it will probably raise its benchmark interest rate in March and that it will reduce its balance sheet. The central bank does not set mortgage rates, but its actions often influence them.

“Policymakers at the Federal Reserve are having an unusual public debate about how fast they should raise interest rates,” Holden Lewis, a home and mortgage specialist at NerdWallet, wrote in an email. “A cautious group favors raising short-term rates by a quarter of a percentage point. A ‘shock-and-awe’ contingent wants to boost by twice as much, and markets believe this more-aggressive bunch will prevail. Meanwhile, some influential voices inside the Fed want to target mortgage rates, specifically, for an upward push.”

Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts it surveyed divided on where rates are headed in the coming week. Forty-five percent said they would go up, 27% said they would go down, and 27% said they would remain the same.

Ken H. Johnson, a real estate economist at Florida Atlantic University, expects rates to continue to rise.

“The yield on 10-year Treasury notes is now above 2 percent, and there is no sign of a slowdown,” Johnson said. “Inflation is rising. The Fed is acting very hawkish. Equity markets are exhibiting risk-on behavior. All of these activities, and others, are driving down the price of 10-year Treasury notes, resulting in higher yields and therefore higher long-term mortgage rates.”

Meanwhile, higher rates caused mortgage applications to recede again last week. The market composite index—a measure of total loan application volume—decreased 5.4% from a week earlier, according to Mortgage Bankers Association data. The refinance index fell 9%, down 54% from a year ago when rates were lower. The purchase index slipped 1%. For the fifth week in a row, the average purchase loan size hit a new high. It was $453,000 last week. The refinance share of mortgage activity accounted for 52.8% of applications, dropping to its lowest level since July 2019.

“Prospective buyers still face elevated sales prices in addition to higher mortgage rates,” Joel Kan, an MBA economist, said in a statement. “The heavier mix of conventional applications again contributed to another record average loan size.”

The MBA also released its mortgage credit availability index (MCAI) that showed credit availability decreased in January. The MCAI slid 0.9% to 124.8 last month. A decrease in the MCAI indicates lending standards are tightening, while an increase signals they are loosening.

“Credit availability declined to its lowest level since August 2021, even as the economy and job market continued to improve,” Kan said in a statement. “The decline in credit supply came at a time of rising mortgage rates and limited inventory, which add to the challenges that some prospective buyers are facing. The supply of conforming mortgage credit dropped to its lowest level dating back to 2013, driven by a decrease in investor demand for loan programs catering to borrowers with higher [loan-to-value ratios] and lower credit score profiles.”